This error means the host's computer (the person attempting to host a game) has a resolution higher than its graphics card can encode, and needs to be lowered.
The resolution is changed through Windows' display settings if friends are joining. You should try something like 1280x720, and increase it from there to see what works.
If you're joining yourself, you'll also need to be aware of Parsec's settings > Host > Resolution, which will automatically switch the display to that resolution when joining. Setting a lower resolution through just Parsec may not fix the error, so in that case change it through Windows and set Parsec to "Keep host resolution".